Chile - Economic Briefing March 2003

Sluggish Global Economy Weighing Down on this Year’s Outlook

A pick-up in economic activity towards the end of 2002 lifted last year’s growth rate a notch above expectations. However, the outlook for this year is clouded by the high oil price and geopolitical uncertainties, which limit the potential growth of the global economy. As Latin America’s most open economy, Chile stands to loose most from the fallout in global demand and the manoeuvring room for additional domestic stimulus policies is limited.

Economy blasts expectations in December but result inflated by seasonal factors
In December, the monthly indicator for economic activity (IMACEC, Indicator Mensual de Actividad Económica) expanded by 4.6% compared to the same month last year. The reading exceeded the 2.1% annual growth registered in November and was almost a full percentage point ahead of expectations in last month’s Consensus Forecast. Moreover, the December performance represented the fastest annual growth rate observed since June 2001 and may thus raise hopes of an improving economy. However, in part, the December data were inflated by seasonal factors, since the month counted one working day more than December 2001. According to seasonally adjusted data, the economy advanced “only” 0.29% compared to the preceding month, following a much more robust 1.49% increase in November.

Nevertheless, the healthy December performance may indicate a trend change. Up to August 2002, the average annual variation of the IMACEC indicator had shown a steady decline, for a period of almost two years. In September the decline came to an end at 1.7%, with growth staying at that level until the final month of the year, when the average growth rate added 0.3 percentage points, from 1.7% in November to 2.0% in December. The quarterly data set also points toward an improvement in the economy. Following on 1.5%, 1.7% and 1.8% growth in the first three quarters, the economy grew at a 3.0% clip in the final quarter of 2002, according to the preliminary numbers.

Economic growth likely to be a notch better than expected in 2002 but remains disappointing compared to past growth rates
Official data for gross domestic product (GDP) for the fourth quarter and the full year 2002 will not be published until end of March. However, based on the preliminary IMACEC data, the economy expanded at 2.0% in 2002, a notch faster than the latest Central Bank estimate of 1.9%, as the year-end boost came in rather unexpected. Last year’s growth rate is by no means a cause for excitement in Chile. Not only did economic activity expand well below the 2.8% growth observed in 2001, but last year’s growth rate pales against the average 7% pace seen throughout the 1990s. Even though it has become increasingly evident that past robust growth rates are unsustainable in the maturing Chilean economy, they are still perceived as a benchmark by which economic performance is measured and a new, more realistic potential growth rate – estimated by some analysts to be between 4% and 5% -- will only gradually become the new yardstick for a broader audience. Consensus Forecast panellists have for some time factored the more moderate perspectives into their long-term outlook, which indicates average growth rates between 4.2% and 5.3% between 2004 and 2007.

Subdued global outlook in the wake of likely war in Iraq and spiking oil prices limit growth in first half of the year
For the near term, the growth perspectives remain significantly dimmer, as war concerns and an ever higher oil price threaten to choke off the global economy and thus the vital external demand for Chilean goods. This effect is seen to limit the growth potential, particularly in the first half of the year, with economic growth seen to average 2.9%. In the second half of the year, the Consensus expects the economy to expand at a faster 3.8% clip, as a majority of analysts anticipate a pickup in the global economy in the latter part of the year. For the full year, Consensus Forecast panellists expect GDP growth of 3.1%, unchanged from last month’s forecast, even though first data for the beginning of the current year suggest the positive momentum from the end of last year remains in place. Industrial production stayed below the 7.2% growth observed in December, amid weak durable consumer goods and capital goods output. However, with a 2.8% growth rate, industrial output remained in positive territory for the fifth consecutive month and industrial sales data picked up from 4.0% growth in December to 4.7% in January. Furthermore, unemployment dropped against the seasonal trend. In the moving quarter from November to January, unemployment reached 7.6% down from 7.8% in the preceding quarter up to December and 0.4 percentage points below the figure for the same period last year. The January data suggest that the IMACEC should come in somewhere between 3.0% and 3.5%.